Hong Kong banks may face 'negative rating action' as risks from mainland-related loans grow, Fitch Ratings said.
Sabine Bauer, a director in Fitch's financial institutions team, warned that if the city's banks continued to prioritise rapid growth in mainland-related loans and lower their underwriting standards, they could experience a deterioration in asset quality and capital strength.
'Banks that have experienced very fast growth over the last two years and those most exposed to the mainland may find it most challenging to maintain solid asset quality in a weaker environment,' Bauer said.
Mainland borrowers have been seeking loans from the city's banks, partly to take advantage of low interest rates and currency exchange rates and partly to evade Beijing's efforts to tighten credit.
Hong Kong-based Chinese banks increased their mainland-related loans by 55 per cent in the first half of the year, while the exposure of non-Chinese banks grew 25 per cent.
Smaller Hong Kong banks that are tempted to expand into the riskier business of mainland-related loans and locally incorporated subsidiaries of mainland banks - such as Industrial and Commercial Bank of China (Asia) and Citic Bank International - face a higher risk of their asset quality weakening, Bauer said.
'In terms of their stand-alone credit profile, the Hong Kong subsidiaries of mainland banks are stronger than their parent banks. But their growth strategy has become very reliant on their Chinese parents,' and this could lead to a weakening of risk management and overall creditworthiness, she said.